6 Ways to get your business “Investor Ready”
No two investors are the same — which is why you should do your due diligence before accepting any offers. To find the best fit, research each type of investor and what they’re offering in return for their funding.
Here are a few types of investors:
1. Angel investors
Angel investors are high-net-worth individuals who use their own capital and resources to nurture and grow small businesses. Since they’re in high demand, they can be picky in where they choose to invest — which usually means prioritizing established businesses over startups.
In exchange for funding, angel investors want a certain percentage of your company. That said, it’s important to think about how much equity you’re willing to give away. Give too much, and you risk losing control of your business.
2. Family and Friends
When it comes to raising capital from family and friends, there are two roads you can take. The first is to ask for a loan. This could be the easiest option for both parties since you pay it back over time, with or without interest.
The second option is with an investment fund — where they own a stake in your company and share the risks and potential returns with you.
It’s tempting to take a casual approach when pitching to family and friends — but we don’t recommend this. Transparency is key here. To avoid straining future relationships, let them know when they can expect to make their money back, and clearly explain the risks.
3. Venture capitalists
Venture capitalists (VCs) use their own money to fund small businesses. While they can help startups, they prefer companies that already have a sound footing.
Venture capitalists can impose numerous requirements for funding. For instance, one VC may require a board seat, while another may require interest. Like angel investors, VCs will own shares of your business and participate in how it’s run.
Another option is a venture capital firm, which is a group of individual investors that fund businesses with high growth potential. These firms have more standard requirements and payout expectations. Although they’re less interested in equity or ownership, they’ll likely attach an interest rate to any money borrowed.
4. Crowdfunding
Crowdfunding is a way for small businesses or startups to raise money in exchange for equity, rewards, debt, or nothing at all.
While it can be a fast and relatively easy way to raise money, you should know which type is best for your business. Here are the most common types:
- Equity crowdfunding: This is the most traditional type of funding on this list. You sell a piece of your business to an investor or groups of investors and they provide the financing to move your business forward.
- Donation crowdfunding: If you’re a nonprofit or local business, donation-based funding might work for you. It simply requires you to create a campaign asking for donations for your business. The money is donated, and there is nothing to repay.
- Rewards crowdfunding: Made popular by sites like Kickstarter, funders are offered products, services, or other gifts in exchange for a set donation amount.
- Debt crowdfunding: With this type of crowdfunding, you borrow money from other individuals instead of a bank. You borrow at a set annual percentage rate, and loans are often structured similarly to those of a traditional business loan.
Keep in mind that crowdfunding can provide you with fast access to cash, but it requires a strong promotional strategy, transparency, and possibly giving up some equity in the business.
5. Traditional Business Loan
A business loan gives you access to capital from a financial institution. It’s usually attached to a set interest rate and repayment plan.
There’s a reason it’s so popular — a business loan is suitable for almost any business. Unlike other types of investors, you can get your business off the ground without sacrificing equity or stake in your company.
To qualify, you’ll need an established credit history or proof of income. Of course, this option isn’t 100% risk-free. When you apply for a loan, you’ll also need to put something on the line for collateral. Collateral is something pledged as security for repayment, such as a mortgage or savings account.
If you’re confident in the loan’s interest rate and repayment schedule, this can be a relatively safe and surefire way to fund your small businesses.
How to Attract Investors
Let’s say you have the names of a few investors you want to pitch to. What’s the best approach when talking to them? To help tip the scales in your favor, consider the following strategies:
1. Develop a rock-solid business plan.
If you’re looking to attract investors, this is the first step.
Investors are generally picking where they choose to invest. You can tip the scales in your favor by developing an air-tight business plan that inspires confidence and trust.
It should outline your business model, your financial goals, and your role in the company. With this information, you can present your business’s current status and future projections.
2. Know your numbers.
One of the most important aspects of becoming “investor ready” is knowing your numbers. This means describing your revenue model, giving profit predictions from market research, and outlining how your business will spend its investments.
More importantly, you need to understand how those numbers will enhance your business. While it’s easy to write a number down on paper, it’s more important to understand (and communicate) why you need capital, where it’s going, and that your valuation makes sense.
3. Land on the right figure.
Here’s a not-so-shocking statement: investors want to know where their money is going. If you ask for too much capital — or too little to make any difference — this could be seen as a red flag.
If you’re stumped on the right figure to ask, you may need input from a third party, such as a financial advisor or consultant. Or, if you’re a scrappy new startup, you may want to consider establishing an advisory board.
4. Think like an investor.
One way to feel more confident as you approach investors is to create a list of their potential objections or questions. If the roles were reversed, what questions would you ask? What objections would you want to be rectified?
In doing so, you can prepare quality responses ahead of time — and investors may find your readiness impressive.
5. Master the elevator pitch.
To master the elevator pitch, you need to describe what problem your business solves, how, and why — all in a sentence or two. If you’re unable to do this, or you’re not exactly sure what problem your business solves, investors won’t know either.
A solid elevator pitch will pique someone’s interest — nothing more, nothing less. Once you grab someone’s attention, you can dive into more detail about your company, the market, and how funding will bring it to the next level.
6. Be ready to walk away.
This tip may seem counterintuitive, but it can save you a lot of stress in the long run. Finding a good fit is imperative when it comes to matching with an investor.
Besides the capital they bring to the table, do you share the same goals and incentives? Do they understand the numbers? Will they become a mentor or resources as you scale your business?
Be ready to walk away if it feels like an investor is offering a bad deal or taking advantage of your business. Yes, you want to fund — but the wrong investor can set your business back.
As you start reaching out to investors, consider using a CRM to manage these relationships. For example, Visible allows you to create a personalized investor database where you can nurture relationships and share target updates.
What documents do investors need?
Investors may think you have a great product or business, but it means nothing if they can’t predict the profitability of their investment.
Clean finances give investors confidence and a clear picture of your company’s health. There are a number of financial statements you should have ready, including:
- Income statements
- Balance sheets
- Expense reports
- Projections over time predicated on the capital you receive from the investment
- Success metrics
Of course, if you’re in the early stages of your business, you may not have all these statements at your disposal. That’s okay — as long as you have enough info to present your company’s current status and a projection of your finances in the coming years.
Final Thoughts
The right investor can catapult your small business to success — but the road to getting there can be long and difficult. But with the right approach, you can stand out from the pack and connect with the right people.
